Anglo American’s future may lie outside South Africa

Almost 100 years after it entered South Africa, the multinational mining company that shaped the course of the country's history may shed its assets there because of debt and the cost of doing business.

Anglo American's platinum open pit mine located in the northwestern part of South Africa. Siphiwe Sibeko / Reuters

Anglo American, the corporation that helped turn South Africa into the world’s gem and gold supplier, may finally be ready to quit the country it helped shape for about a century.

Anglo, as it is mostly called, was once a cradle-to-grave employer that owned not just vast diamond, gold and other mineral assets, but a cross-section of South African industries spanning most sectors. At its height in the 1980s, Anglo owned food producers, packaging companies and others.

So pervasive was its influence that in the media sector, it owned shares in rival newspaper firms, the paper mills they depended on and even the very forests these fed on.

It was, however, minerals that ran through Anglo’s corporate culture, and which were its main focus.

“It was the ‘golden handcuffs’ – the company pension – that kept me there,” says Mauritz de Villiers, a retired geologist who began working at Anglo in the 1970s and held the job until he retired about four decades later. “I stuck it out my entire career and never worked anywhere else, for that pension. A lifetime’s work for a few years of fishing.”

Tens of thousands shared Mr de Villiers’ job-for-life journey with Anglo. The company was founded in a smoke-filled drawing room in 1917 by, among others, Sir Ernest Oppenheimer. Today Oppenheimers’ descendants are one of Africa’s wealthiest families.

“South Africa’s economic development basically began with gold and diamonds, and Anglo was a major part of that,” Dave Mohr, the chief strategist at Cape Town-based Old Mutual Multi-Managers, told Bloomberg. Not all employees fared as well, of course, but there can be little argument that Anglo has shaped South Africa’s destiny, the good and bad.

Soon after founding, it acquired a large stake in de Beers, for many years the world’s foremost diamond producer that fiercely guarded its monopoly over the market. Today, Anglo controls de Beers outright and it is still one of the world’s largest gem producers, although its monopoly status is now a thing of the past.

Anglo also built and managed dozens of gold mines and helped underpin South Africa’s role as the world’s largest supplier of the precious metal for much of the 20th century.

Over the past two decades, however, the company has shifted the direction of its South African operations to focus on platinum, of which it is the world’s largest producer, as well as on iron ore and diamonds. It also owns coal and manganese assets in the country, the latter being produced in the suitably named Hotazel region in the northern Karoo desert.

In 1999 Anglo listed in London where it joined as a FTSE 100 company, and used the opportunity to raise capital to fund an ambitious global expansion plan. It now operates in Australia, the Americas, Asia and Europe.

This may prove to be Anglo’s undoing. When the commodity cycle in the 2000s began racing to heights few predicted, company executives went shopping.

In 2008 Anglo paid about US$5.5 billion to Brazilian billionaire Eike Batista for Minas Rio, a developing iron ore mine. Anglo then had to spend about $8.4bn more to bring it to full production, which began in 2014, more than twice what was originally projected.

“Decisions were made to buy very expensive assets at the top of the commodities cycle. That’s their biggest problem and the main reason that they’re now having to sell,” Mr Mohr said.

By June this year, Anglo’s net debt of $11.7bn was hanging like a cold dead hand over its balance sheet, which produced underlying earnings before special items of just under $1.4bn.

The turnaround began with shuffling chief executive Cynthia Carroll, an American, out the door and replacing her with Australian Mark Cutifani. It fell to Mr Cutifani to turn the bus around, and in the context of a weak commodities market selling parts of the business was inevitable.

“We will continue to divest non-core assets using strict value thresholds as we continue to reduce our debt levels and position the core business on a foundation to deliver sustainably positive cash flows,” Mr Cutifani told shareholders in June.

To achieve this Anglo has begun shedding assets it sees as non-core. This month it sold its holding in Exxaro, one of South Africa’s largest coal producers for $215 million. The previous month it disposed of three platinum operations in the north of the country. More are sure to follow.

At present, South Africa is an important source of income, accounting for about 40 per cent of its earnings. The rest of Africa provides 25 per cent, Australia 20 per cent and South America slightly less.

At the same time South Africa is one of the more difficult locations for a mining company to do business, even one as experienced as Anglo. The industry and government are at odds over changes to a law designed to put more of the industry’s wealth in black hands.

There is also an impending legal suit against the mining industry as a whole, that could result in damages of up to $3.4bn in claims from former employees suffering from silicosis, a lung disease. The claims go back decades and include widows and orphans of miners who have since died from the condition, which is caused by fine particulates that damage the lung tissue and for which there is no cure.

Anglo and the other defendants in the lawsuit have collectively said they are exploring their legal options in the case.

Coupled with a rumbling dispute the mining sector has over government-mandated quotas for black participation, Anglo may feel its future lies elsewhere.

Timeline

Anglo American was founded in 1917 by Sir Ernest Oppenheimer, the son of a German cigar merchant, who began his working life at a diamond brokerage in London while still a teenager, before moving to Kimberley in 1902 as a young man of 22. The initial £1 million (Dh4.5m) capital was raised in the US and UK, which was the inspiration for the name.

Ten years later Anglo American moved on de Beers, a diamond mining firm set up by Cecil Rhodes, the arch imperialist who established Rhodesia (now Zimbabwe). Under Anglo’s direction de Beers would become a global cartel that fiercely defended the price of diamonds and their sale. In 1947 it had a New York advertising agency devise the slogan “a diamond is forever”, possibly one of the best known marketing catchphrases ever.

Over the next decades the company set up gold, coal and other mineral operations around the country. At the same time South Africa’s labour and race laws too were evolving. Not long after the first gold and diamonds were discovered in the late 1800s, newly formed mining companies ran desperately short of workers.

Black tribesmen were not eager to work in the dangerous environment of underground mining, especially not when they already had fields to tend. White fortune seekers who had poured in during the early days of the gold and diamond rush left once the surface workings were exhausted.

The government of the day responded by introducing hut taxes, to force blacks to work for cash. Thus began a tradition of employing migrant workers from all over rural southern Africa, a practice that continues today.

During the 1960s Anglo began diversifying its considerable earnings into other industries. It did so out of necessity as the Apartheid government, afraid of capital flight as the world turned against its policies of racial segregation, limited the amount of money firms could invest offshore.

It found its way into forestry, paper, retail, car manufacture and assembly, steel, insurance, food processing, banking and property, the media and numerous other ventures. So widespread was Anglo’s activities that it became referred to by the public and in financial journals as “the octopus”.

By the time Apartheid ended in 1994 Anglo American controlled 60 per cent of the wealth of the Johannesburg Stock Exchange. With a loosening of restrictions following the advent of democracy Anglo tried to go global, listing in London in 1999 where it instantly became a FTSE 100 company.

It still remained Africa-focused although, until the mid-2000s when it began looking further afield. It now has a presence on every continent except Antarctica, but has not done very well for that.

Trying to open mines in countries where it has little history has laden it with debt that has grown so huge it is now forced to sell off assets. Some of its most valuable are iron ore and platinum holdings in South Africa.

The company borne on African soil may now be forced to exit to survive.